Baptist Foundation execs found guilty
The Business Journal of Phoenix - 11:55 AM MST Monday
by The Business Journal

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Two executives of the defunct Baptist Foundation of Arizona were convicted Monday on four counts each of fraud and knowingly conducting an illegal enterprise.

Former President William Crotts and General Counsel Thomas Grabinski were accused of defrauding more than 11,000 investors out of $550 million when the foundation collapsed and went into bankruptcy proceedings in 1999.

Investors have been able to recover about $250 million through subsequent civil litigation.

The men will be sentenced Sept. 29 in Maricopa County Superior Court.

The verdicts came at the end of a 10-month trial, the longest criminal trial ever prosecuted by the Arizona Attorney General's Office.

For more: www.superiorcourt.maricopa.gov.

2 guilty in Baptist fund trial: Jury rules pair committed fraud in $500M debacle.
Gary Grado, Tribune (Mesa, AZ); 7/25/2006

Jul. 25--Two former executives committed fraud to hide their financial mismanagement of the Baptist Foundation of Arizona, but they didn't line their own pockets, jurors said in convicting them Monday. The convictions signal an end to the seven-year legal saga of the foundation's collapse in which as many as 13,000 investors lost an estimated $500 million to $600 million. The only question remaining is how much time the group's former president, William Crotts, and former general counsel, Thomas Grabinski, will spend behind bars. Crotts, 61, and Grabinski, 46, are facing prison terms of six to 86 years at sentencing Sept. 29. Jurors ended the 10-month trial -- one of the longest in Arizona history -- by finding each guilty of three counts of fraud and one count of knowingly conducting an illegal enterprise. However, the jury acquitted each man of 23 counts of theft. Juror Nathan Redmond, 30, said the men simply dug themselves a financial hole. "They got caught up in something they couldn't get out of," Redmond said.

Jury foreman David Dodd, an accountant, said: "We felt they really wanted to make things happen -- they just went about it the wrong way."

Daryl Williams, an attorney for Grabinski, said investors lost money only because the state shut the foundation down, which forced it to sell off many of its assets, such as its property, at cut-rate prices. "You can't tell me these people got ripped off," Williams said after the verdict. "This is extremely disappointing and shocking."

Juror Sue Favia, 35, an Ahwatukee Foothills elementary school teacher, said the jury acquitted the men of theft after reviewing the language in circulars sent to investors, which stated that their funds were for "general purpose" and some dividends would come from other investors.

"We felt that was enough to cover their butts," Favia said. The nonprofit Baptist Foundation of Arizona was founded in 1948 to raise money for Southern Baptist causes, such as building churches.

Prosecutor Donald Conrad alleged in court that the group's sales pitch was based on religious faith, and investors -- most of them elderly -- were told the nonprofit was solvent, even though Crotts and Grabinski knew it was losing millions of dollars. Conrad said the foundation hid its losses from its accountant, Arthur Andersen LLP, by putting them into affiliate companies, which investors weren't told about and gave the illusion that it was making a profit. "This case has really been about the victims," Conrad said. "So many lost their life savings."

Attorney General Terry Goddard said investors recovered roughly 70 cents on the dollar after lawsuit and bankruptcy settlements, which is above average for fraud cases but still a substantial hit for a retiree. One victim, Harold McPherson, lost nearly $100,000 after investing nearly $250,000 over two decades. "I guess I put my trust in the wrong people, McPherson said. Ron Kaiser, 57, said he invested about $43,000 in the foundation beginning in the late 1980s. "Luckily, I was young enough to be able to recoup most of that." Baptist Foundation of Arizona timeline August 1999: The Arizona Corporation Commission issues cease and desist order to BFA and its subsidiaries.

November 1999: BFA files for bankruptcy November 2000: A federal judge signs off on a bankruptcy settlement plan that cashed in an estimated $240 million in BFA assets. December 2000: The Arizona State Board of Accountancy files a complaint against Arthur Andersen LLP, BFA's accounting firm since 1984, and seeks $600 million in restitution for investors. January 2001: The Arizona Corporation Commission and Arizona Attorney General's Office file suit against Arthur Andersen for issuing "clean" opinions of BFA's financial health. April 2001: A grand jury indicts BFA's former president, William Crotts, and former general counsel, Thomas Grabinski, former board members Lawrence Hoover and Harold Friend and former secretary of Christian Financial Partners Richard Rolfes on various fraud and theft charges. May 2001: BFA employees Donald Deardoff, Edgar Alan Kuhn and Jalma Hunsinger plead guilty to various fraud and theft charges and agree to testify for the state. May 2002: Arthur Andersen pays $217 million to settle the lawsuits a week after trial begin. Jennings, Strouss and Salmon, the Phoenix-based law firm for the foundation, also paid $21 million to settle allegations it was negligent. After lawyers fees, the investors had approximately $203 million to split. September 2004: Rolfes pleads guilty to facilitation of fraud. September 2005: Criminal trial of Crotts and Grabinski begins. Friend pleads guilty and agrees to be a state's witness. July 24, 2006: A jury convicts Crotts and Grabinski, each on three counts of fraud and one count of knowingly conducting an illegal enterprise. However, the two are each found innocent of 23 counts of theft. - Tribune writer Dennis Welch contributed to this report - CONTACT WRITER: (480) 898-6573 or ggrado@aztrib.com

Copyright (c) 2006, The Tribune, Mesa, Ariz.
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Background:
When the Baptist Foundation of Arizona went bankrupt in 1999, it owed more than $550 million to more than 11,000 investors. In 2001, Janet Napolitano, as state attorney general, helped bring fraud charges against eight foundation officers or associates.

President William Crotts and legal counsel Thomas Grabinski are on trial in Maricopa County Superior Court, charged with fraud, theft and illegally conducting an enterprise.

Board member Lawrence Hoover is awaiting trial.

Donald Deardoff, Richard Rolfes, Edgar Kuhn, Jalma Hunsinger and Harold Friend have pleaded guilty to felony charges, some in exchange for testimony in the Crotts-Grabinski-Hoover trials.
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Fraud trial begins for ex-execs of Baptist Foundation
Investors lost $550 million
Michael Kiefer, The Arizona Republic
Sept. 23, 2005 12:00 AM

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Was it fraud or a long-term investment strategy that hadn't yet come to fruition?

Those were the opposing positions of the prosecution and defense attorneys as the trial began in Maricopa County Superior Court Thursday for two former executives of the Baptist Foundation of Arizona.

William Crotts and Thomas Grabinski each face three counts of fraud, 27 counts of theft and two counts of illegally conducting an enterprise in the wake of the foundation's 1999 bankruptcy. They are accused of taking more than $550 million from more than 11,000 investors. If convicted, they each could be sentenced to nearly 34 years in prison.

Five other BFA employees or associates have already pleaded guilty to related felony charges in exchange for their testimony against Crotts and Grabinski. A sixth is too ill to go to trial.

It's been called the largest "affinity fraud" ever, meaning that it targets a specific group, in this case a religious group. The investors, many of them elderly, were encouraged to use their money to "do the Lord's work," building Baptist churches and retirement homes, as it earned high interest rates.

"Do good while doing good," was one sales motto repeated in a videotape shown to the jurors by Assistant Attorney General Donald Conrad, who is prosecuting the case.

"That spiel was repeated thousands of times to thousands of people," Conrad told the jury.

Conrad painted a picture of a failing enterprise that shuttled bad debt and overvalued property to two phantom companies under the foundation's control so the foundation would appear profitable and continue to attract new investors. The "off-the-books" companies showed enormous losses, but some of the money flow was hidden even from the foundation's auditor, the accounting powerhouse of Arthur Andersen.

Crotts, the foundation's president, and Grabinski, its legal counsel, hid the foundation's losses out of pride and fear of losing their respected position in the Baptist community, Conrad said.

"Pride goes before a fall," he said, paraphrasing Scripture.

But defense attorney Michael Piccaretta portrayed Crotts as a church-going family man, and scoffed at the prosecutor's claims that he committed fraud out of pride.

"Fraud cases are about money," he said. "Bill Crotts thoroughly believed in his mission."

And the "off-the-books" companies, he said, were holding notes and properties that the foundation expected to be valuable as real estate prices rose. As an example, he cited 7,000 acres of West Valley property that once belonged to a BFA subsidiary and has since become an upscale residential development.

If the AG's Office had not forced BFA to stop selling investments in 1999, Piccaretta claimed, none of the investors would have lost any money.

But investors say they feel betrayed.

"I want them to go to prison," said Arlys Jensen of El Mirage.

She and her mother, who has since died, invested nearly $132,000. In 1998, when Phoenix New Times began a series of articles about accounting irregularities , she questioned BFA officials who assured her that everything was fine.

"Who are you going to believe," she asked, "the Baptists or the New Times?"

The Attorney General's Office began its investigation soon after.

"My wife and I lost 90 percent of our life savings," said Forrest Bomar, a retiree who lives in Texas and is not sure if he will attend the trial.

The Bomars invested $250,000 and have recovered about $150,000 in settlements related to BFA, the biggest chunk from a $217 million payout by Arthur Andersen. The once-respectable accounting firm went out of business in 2002 after paying hundreds of millions of dollars in settlements for its involvement in the BFA and Enron scandals.

How many of the reported 11,000 victims would attend the trial was unknown. Judge Kenneth Fields had tried to limit the numbers due to the scarcity of seats in his courtroom, but attorneys for victims' rights groups appealed to a higher court, which ordered Fields to accommodate all victims who wanted to attend.

Fields then moved to a larger courtroom, made plans to televise the proceedings and weighed the possibility of moving the trial to an auditorium at Arizona State University.

Fewer than 20 of BFA's reported victims appeared at the trial's opening arguments Thursday, however, outnumbered by the defendants' friends and family.

The trial is expected to last six months. Three jurors were dismissed Thursday after coming up with new reasons they could no longer serve. Fields seated two new jurors before the day's arguments began.

Grabinski's attorney is expected to make his opening statements today.

Accounting firm under fire for alleged foundation fraud
By Bob Allen, NACBA.net

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PHOENIX (ABP) -- The state of Arizona has sued accounting giant Arthur Andersen for $600 million on behalf of 13,000 investors who two years ago lost money in the collapse of the Baptist Foundation of Arizona.

The Wall Street Journal reported April 26 a joint lawsuit by the Arizona Corporation Commission's securities division and the state's attorney general, along with disciplinary action by another state agency.

The cases follow an earlier complaint by Foundation trustees that Arthur Andersen failed to properly audit the not-for-profit charity, while its officers allegedly misled investors by hiding losses and operating a "Ponzi scheme" in which money from new investors was used to pay off other investors. Those allegations are the latest turn in the largest fraud case involving a religious organization in U.S. history.

Arizona's attorney general's office is reportedly also conducting a criminal investigation but has not said whom it is targeting or when anyone might be charged.

The suits against Arthur Andersen, whose parent company had more than $16 billion in revenue in 1999, could be good news for investors, who would be recipients of any award. Investors currently expect to receive either 31 percent or 44 percent of their investment over the next five years as part of a BFA restructuring plan.

The Foundation reported about $640 million in debts and $240 million in assets when it filed for bankruptcy protection in November 1999.

Investors received the first $20 million, 3.5 percent of their total claim, from a court-ordered plan to liquidate the Foundation's assets in January. A second payment of an undisclosed amount was expected around the end of April.

Arthur Andersen claims it has done nothing wrong. A spokesman told the Wall Street Journal that the firm was neither negligent nor involved in fraud or a cover-up. He said Andersen is liable only for the estimated $175,000 a year in fees it has received since 1984, and not investor losses.

"Any time senior management conspires to defraud investors, this kind of complicated fraud will be very difficult to detect," said Ed Novak, an outside attorney representing Arthur Andersen. Novak predicted the state would have a hard time proving its case.

It is the second time in a decade that Andersen has been in trouble in Arizona, according to a December article in the Arizona Republic. Without admitting any wrongdoing, the firm in 1992 agreed to pay up to $30 million to settle claims stemming from the collapse of Charles Keating's financial empire.

According to pending court documents, Andersen did not, as it claimed, conduct annual audits of the Baptist Foundation of Arizona in accordance with generally accepted accounting standards. Because of that, lawsuits contend, Foundation officers were able to continue to defraud investors by pointing to clean audits by the accounting firm.

Documents also allege that Andersen ignored red flags, including specific information from a whistle-blower, an anonymous phone call and a series of newspaper articles in 1998 that brought to light many of the allegations that are now in litigation. Auditors continued to give the clean audits, it is alleged, relying on information provided by Foundation officers.

The Baptist Foundation of Arizona was founded in 1948 by the Arizona Southern Baptist Convention for the purpose of raising and managing endowment funds to further Southern Baptist causes.

The agency allegedly ran into trouble in the early 1980s, when under leadership of president and CEO William Crotts it began offering individual Baptists high rates of return while promising that some of the money would be used to fund new churches and other programs.

Crotts and other members of the Foundation's senior-management team resigned in August 1999 after the Arizona Corporation Commission froze Foundation investments, citing violation of disclosure policies in state regulations.

The Foundation invested funds heavily in property, unlike other state Baptist foundations that avoid speculative investments. When real-estate markets suffered during the late 1980s, Foundation officers, feeling pressure to show profits, allegedly set up a web of subsidiary organizations to hide losses from investors through artificial paper transactions.

An example of how the scheme worked, from the lawsuit by the Foundation against Arthur Andersen, concerned a transaction recording $3.5 million gift income based solely on a pledge from an individual named William Gahan.

Arthur Andersen questioned whether the gift was collectible in its 1991 audit. To satisfy the auditor, the Foundation's senior-management team allegedly engaged in a "swirl" transaction with subsidiary corporations.

Without approval of the Foundation's board of directors, the officers in 1992 allegedly provided about $3.5 million in cash to a subsidiary, Arizona Southern Baptist New Church Ventures, Inc., in return for a $3.5 million promissory note by Gahan.

The same day, New Church Ventures paid the same $3.5 million to ALO, Inc., a for-profit corporation purportedly owned by Foundation trustee Jalma Hunsinger, in return for a $3.5 million line of credit. To close the circle, according to court documents, ALO paid the same $3.5 million to the Baptist Foundation of Arizona in return for assignment of the Gahan pledge.

Arthur Andersen allegedly accepted receipt of the payment from ALO for the pledge to recognize the $3.5 million income. ALO later determined the Gahan pledge was worthless in a report to the Arizona Corporate Commission in 1994.

Another example, according to a court document, involved a reported $2.7 million donation by Crotts' father, William Crotts, obtained only weeks earlier for a fraction of that cost.

Crotts allegedly purchased cash-flow interests related to two properties on Guam from ALO for $200,000 in December 1994. On Dec. 29, just prior to the end of the fiscal year, he allegedly donated the interests to the Foundation, which valued them at $2.7 million. Arthur Andersen, according to the lawsuit, did not question the value of the transaction.

Meanwhile, representatives of the Baptist Foundation aggressively recruited new investors in churches.

Dianna Francis of Golden Shores, Ariz., a small community near Needles, Calif., and her husband invested $35,000 from their son's Navy death benefit with the Foundation.

A Foundation representative gave a presentation in her church. She said she was told the money would be used to grow churches, and she would receive higher interest than if she invested it in a bank.

"My money would grow and God's kingdom would grow. It was perfect," Francis said. She locked her money in for 10 years, rather than opting for a shorter term. "I chose to do long term so it could do more for God's kingdom," she said.

"I never had the money to do this before," she said. "Since my son left this money, I wanted to do something that honored God and my son's memory and still have the money to put my daughter through college."

When she finally asked for some of the money to pay for her daughter's wedding, she was told that all funds were frozen. She never imagined, she said, that her money was being used to buy golf courses and overseas properties and pay salaries up to $200,000 a year.

"We were deceived," Francis said, comparing the Foundation presentation in her church to "the moneychangers in the Temple."

Francis said that dollar-wise, she has not suffered nearly as much loss as others. She said she takes groceries to a neighbor who lost $70,000. Other friends had $750,000 invested, she said, and quarterly interest was their only income. "Now that there isn't anything there, I take them food, too," she said.

But Francis says the worst damage is not material. "You don't know the spiritual damage that's been done to people," she said. "The money is the money. We need the money -- some more than others."

She said Baptist officials are reluctant to discuss the scandal for fear that it "gives God a bad name."

"It doesn't give God a bad name," she said. "It gives the people who use God's name a bad name. God wasn't in this."